Purchase mortgage applications remain buried near record lows, a condition that has persisted for 5 months. That means that housing sales data over the next two months will continue to be terrible. And in spite of what you heard from the media, the data reported this week was all negative. Prices were down 1% in October and are down 5.7% since June, and demand is worse than ever.
New data reported this week from the Realtors, home builders, Case Shiller, and the Commerce Department’s survey of new home sales all showed upticks. Three of them were on a seasonally adjusted basis. That is absolutely meaningless because conditions were already near record lows for this time of year from the anti-seasonal collapse in activity over the past several months. It’s hard to go lower when you’re already at historic, rock bottom levels, but lo and behold, when the seasonal hocus pocus is removed, the numbers actually were worse—worse month to month, and much, much worse versus last year at this time.
There will be no housing recovery until household formation begins to grow again, and that will only happen when total employment begins to increase in a sustained way that isn’t tied to some artificial government prop.
Mortgage Applications
Mortgage purchase applications rose in the week ended October 22 by about half as much as they had fallen in the previous week. Applications remain near rock bottom levels, unresponsive to the record plunge in mortgage rates. The Fed’s strategy to drive down long term rates to stimulate the housing market has failed miserably. So now what are they about to do? More of the same, or rather, even more of the more of the same. You know about the definition of insanity. These people are obviously insane.
Applications are now down 31% versus this date last year, down 39.4% since the end of the homebuyers’ tax credit, and down 29.9% since April 2009 when mortgage rates made their last previous low. Applications are down 66.5% since the May 2005 peak. Rates are now 40 basis points lower than they were in April 2009 and yet sales are far weaker. Even worse, the market has now been dead in the water at these levels for 5 months, including what are usually the strongest months of the year. Where do we go from here? Falling rates have not stimulated sales. Nor have falling prices enticed buyers into the market. The level of applications remains at the lowest levels of the past 15 years.
Case Shiller
Here's where we get to the worst housing indicator in the world. The Case Shiller Index released on October 27, purportedly representing market conditions in August, is one of the most misleading of housing industry reports. Its 10 city index barely edged lower from 162.28 to 162.13, a loss of less than 1/10th of 1%. Just to give you an idea of how absurd that is, listing prices in the 10 cities in that index fell by 1.7% between July and August, the period which the Case Shiller Index pretends to represent. If listing prices fell by 1.7%, then sales prices must have fallen by at least that much.
The problem is that the Cash Shiller Index does not really represent prices in August, but actually represents the average contract price as of early to mid May, 5½ months ago, just after the peak of the price distortion caused by the tax credit. It reveals absolutely nothing about current conditions. I should refer to it as the “home sellers’ ” credit instead of the home buyers’ credit because the sellers got actually got the money, but buyers sure didn’t, given what’s happened to the market since the credit expired. That's a story which the CSI will only get around to next month.
You are familiar with my complaints about this index, yet the mainstream media continues to report it as if it is the holy grail. It’s insane the way the media reports it. A few reporters have given grudging, half hearted recognition to the problems with this data. I previously posted a rant on this subject that did not get wide coverage. https://wallstreetexaminer.com/2010/09/28/the-trouble-with-case-shiller/ I will have to try again.
Why is the Case Shiller data both inaccurate and misleading relative to current market conditions? Let’s see. The data is collected from a month ended two months ago. That data is from public sources for closed sales, not contracts. So the current data represents sales that happened mostly in two months before that. Then that data is aggregated with the data collected in the two previous months, for sales contracts from the two to three months before that, and reported as an average price for the 3 months. The theoretical midpoint of the data reported now from 3½ months ago, represents the average contract price from roughly 5½ months ago. The media and its captive economist pundits treat this as somehow being a good indication of current market conditions. It’s anything but. Since I have been covering this index, I have complained about their use of seasonally adjusted prices making the index even a worse indicator than it already is given the built in 5½ month lag. Perhaps S&P, who publishes this index heard me, because prior to the April release they issued a press release that said that, due to issues with the seasonally adjusted data, greater reliance should be placed on the unadjusted data. Congratulations to S&P for once again recognizing the obvious.
The data reported today is meaningless. The only reason I report this data each month is because it is so widely reported that it must constantly be debunked, lest anyone thinks that it means something. It also gives me the opportunity to catch up with the real time data from Housingtracker.net for the 10 cities in the index.
Housingtracker.net Data
Housingtracker.net accumulates real time listings data from the MLS’s of 55 large metro areas around the US. Although listing prices are not sales prices, they do track the sales price trends closely.
Below is a table of what has happened in the 10 cities in the Case Shiller 10 City Index (CSI) since the end of August. The 3 month decline is now 3.6%. That’s on the heels of a 1.7% drop in July and a 0.4% drop in June. Listing prices have now dropped 5.7% since the end of the government giveaway. This cost will now come back to the taxpayers again as even more houses are forced into foreclosure.
Foreclosuregate now throws a big question mark into the supply demand equation. With foreclosed properties off the market, it’s possible that things could firm up for homes without a cloud on the title. Or it’s equally possible that buyers will be so afraid to bid on anything that the market may just shut down. Nobody knows because there’s no historical template. We’ll just have to wait and see.
The longer these properties stay off the market, and the more they are allowed to deteriorate, to the point of becoming non-functional, paradoxically the closer the market may come to equilibrium of supply and demand and the foundation of recovery. It’s a process that could take years. However, any recovery is most likely to be confined to areas without large numbers of foreclosed properties. For large parts of California, Florida, and Nevada, it’s over. Many neighborhoods will be abandoned. If policy makers again take actions to paper over the problems, then the main problem of too much inventory will persist because builders will continue to build when it's not economic to do so.
By focusing on indicators which understate the breadth and scope of the problem, the market is engaging in an act of denial which will only lead to more pain as policy makers try to paper over the problem. The only solution is to remove excess inventory, write off all the bad loans once and for all and allow the market to clear. It will be painful, but it is essential.
The above is exceprted from The Worst Housing Indicator in the World posted October 27 in the Wall Street Examiner Professional Edition. Stay up to date with the machinations of the Fed, Treasury, and foreign central banks in the US market, along with regular updates of the US housing market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days.
